Thoughts on MTEF. 1 of Many: Debt Issues

The new government has released it medium term expenditure framework, outlining its spending plans over the next three budget cycles. I have many thoughts but won’t talk about them all. I will pick out a few things which I think are interesting. The first is on the FG’s debt plans. According to the MTEF the FG plans to raise N1.2tn from domestic markets in 2016, N1tn in 2017 and just above N1tn in 2018. Although you cannot argue with the mantra of increasing debt during a downturn, there are two things the FG needs to really think about.

 

New Credit

 

First is the impact of raising money from domestic markets on credit to the private sector. The graph above shows the monthly flow of new credit to the government and the private sector. Think of it as what part of the economy grabs new credit. Two things are clear. Higher credit to the government implies lower credit to the private sector. Whenever the government starts to raise money from domestic markets new credit to the private sector falls. On the other hand whenever the FG starts to pay down its debt or reduce its new borrowings credit to the private sector increases. The crowding out effect is very real. The effect was somewhat mitigated after domestic bonds were listed on the J.P Morgan index thanks to the new class of foreign buyers of Nigerian domestic debt. This allowed the FG raise new debt without the negative crowding out effect on the private sector. Of course now we know that ship has sailed. Thanks GE.

 

Second, the FG’s accumulation of domestic debt is at an all time high and rising. This is even before the new debt plans. If we also throw in the fact that foreign players are not buying domestic debt anymore then the situation is very worrying.

 

Morale of the story: It is difficult to see how the government can successfully raise over N3tn from domestic markets over the next three years without really crowding out the private sector, and without getting international participants back on board. As Kalu Idaka Kalu put it; it is internally inconsistent. Credit to the private sector is really important if we want to get growth back above the 3% it is now.

 

NB: Data is from the Central Banks Money and Credit Statistics http://cenbank.org/rates/mnycredit.asp

 

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